Bank of America (Asia), the locally incorporated retail arm of the United States' largest banking group, yesterday reported a 14 per cent increase in net profit from its Hong Kong and Macau operations to $721 million for last year. The bottom-line improvement followed a 12 per cent increase in net interest income to $1.11 billion and a lower provisioning bill of $75.29 million compared with $88.1 million previously. The bank's loan book was up 5 per cent to $22.3 billion, though net interest earned on loans was down slightly from 3.8 per cent to 3.7 per cent. Reflecting the experience of its larger local rivals, BOA (Asia) saw a decline in commercial lending - down 4 per cent - but an increase in consumer-related loans, which were up 8 per cent. President and chief executive Samuel Tsien Wai-kee said the outlook for this year remained challenging. 'While the worst seems to be over for the banking industry, competition is fierce and margin spreads are compressing fast,' he said. Given the linked exchange rate system and the upward bias of US interest rates, there was no room for Hong Kong interest rate reductions in the near-term, said Mr Tsien. In the circumstances loan demand was expected to remain weak until the second half of the year. The final stages of interest rate deregulation would further increase the cost of funding for all banks, he said.